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In today's rapidly evolving consumer market, growing brands face a unique set of challenges, especially when it comes to managing finances and scaling up production. To better understand these challenges and how brands can overcome them, we sat down with Virgil Leung of GreenSpark Finance, a former fractional CFO who’s building unified cashflow management tech that specializes in helping high-growth consumer brands optimize cashflow
Q: Can you tell us a bit about your background and what led you to co-found Green Spark Finance?
A: I'm a career investment banker and private equity professional. About five years ago, I joined a DTC startup as a founding member, but I saw a more valuable approach. In early 2022, I identified a gap in the market: fractional CFO shops were not providing adequate service, and there was a significant cash need among brands. We started GreenSpark to address these issues, focusing on providing clean financials, helping brands understand their cash needs, and more importantly, managing and solving those cash needs.
Q: What is your typical client profile, and how has the company grown since its inception?
A: Green Spark Finance has experienced rapid growth, with clients ranging from $2 million to $30 million in revenue, and diverse growth rates ranging from 0% to 500%. We are projecting high levels of growth in 2024, which highlights the high demand for cashflow services in the emerging consumer brand market. Today, we are focused on continuing to build out our current cashflow systems into a full-blown unified cashflow management tech platform that gives brands real-time control.
Q: What are some of the unique financial challenges that high-growth consumer brands face, particularly when expanding into retail?
A: High growth in the consumer space means a high need for cash, which grows exponentially as brands expand. For example, if a brand receives a large purchase order from a major retailer like Ulta, they need immediate access to significant funds to fulfill that order. Traditional financing options like community bank loans or credit cards are often insufficient to meet the substantial cash requirements for scaling operations quickly. The cash cycle is also a major challenge, with brands often facing long lead times (e.g., 120 days) to procure products and build inventory before they can fulfill orders and receive payment.
Q: Why is it crucial for growing brands to have clean financials and a strong handle on their cash flow?
A: Clean financials are essential for making informed decisions about where to allocate resources and how to scale the business. They allow brands to identify gaps in their business model and develop a clear growth financing strategy. Cash flow management is also critical, as brands need to ensure they have enough working capital to cover the long lead times associated with production and inventory build-up.
Q: Can you walk us through the cash cycle challenges and long lead times that brands often face when scaling up production?
A: Absolutely. Let's say a brand receives a large purchase order from a retailer like Ulta. The retailer typically requires the brand to have 8 weeks (60 days) of inventory on hand, but it can take up to 120 days just to procure raw materials and manufacture the products. Then, the brand needs another 30 days to fulfill the order and another 30 days of invoicing terms (i.e. waiting around for the invoice to get paid by the retailer). This adds up to a total of 240 days (or 34 weeks). However, purchase order financing usually only covers costs in the last 30-45 days before delivery. This means the brand needs to find a way to bridge the cashflow gap for the first 200 days of the production cycle.
Q: What are some of the different financing tools available to help brands manage these cash flow gaps?
A: Several financing tools are available, such as purchase order (PO) financing, asset-based lending (ABL), and invoice factoring. PO financing is typically used in the short term, right before fulfilling an order, to cover immediate production costs. ABL offers more flexibility and can be used to manage inventory and receivables over a longer period. Invoice factoring is a method for managing cash flow related to accounts receivable, particularly useful for companies awaiting payment after completed sales.
However, it's important to note that these tools often only cover a portion of the entire supply chain timeline, so brands need a comprehensive financing strategy that addresses their specific needs at each stage of growth. Which is what we at GreenSpark specialize in by working with partners like Lunr.
Q: How did you first come across Lunr Capital, and what impressed you about their approach to financing?
A: We were introduced to Lunr when they were looking to finance the growth of a brand that needed help getting their financial stack in better shape. What impressed me about Lunr was their deep understanding of the cashflow challenges that consumer brands face and their ability to provide tailored solutions that address those specific needs. They really take the time to understand each brand's unique situation and goals, and then craft a financing strategy that supports their growth trajectory.
Q: What sets Lunr apart from other financing options in the market?
A: Lunr's ability to provide financing solutions that align with a brand's supply chain and growth trajectory really sets them apart. Their team's background in retail buying allows them to provide valuable industry insights and connections beyond just financing. They understand the entire timeline of a product's journey from production to sale and can provide solutions that address the specific cashflow needs at each stage. More specifically, they are one of the very few unique capital partners that fill the 200 day cashflow gap at the beginning of production we walked through in the example earlier.
Q: As brands continue to grow, does the need for strategic financing diminish?
A: Actually, the cash flow challenge persists as brands continue to grow, even at higher revenue levels (e.g., $100 million+). Brands need to keep solving this problem until they reach a point where they choose to slow down growth. While the problem is more acute in the early stages due to lower margins for error and limited access to capital, it remains an issue even for larger brands, albeit with more room for inefficiency.
Q: How does the role of a CFO evolve as brands scale, and where do fractional CFOs fit into this evolution?
A: There are three key functions of a CFO: strategic, tactical, and operational. As brands reach around $50 million in revenue, they may hire an in-house CFO to handle the strategic aspects. However, fractional CFOs remain valuable in providing tactical and operational support to the in-house CFO and finance team.
Q: To wrap up, what would you say is the key takeaway for growing consumer brands when it comes to managing their finances and fueling growth?
A: The key takeaway is that having a strong financial foundation and a comprehensive financing strategy is essential for success. Growing brands need to have a clear understanding of their cashflow cycle and the specific financing needs at each stage of growth. Partnering with a fractional CFO and working with specialized financing providers like Lunr can help brands navigate the complexities of scaling up and position themselves for long-term success in the retail space.
As consumer brands continue to grow and expand into retail, having the right financial strategies and partnerships in place is more important than ever. Virgil and his team at GreenSpark Finance play a crucial role in helping brands optimize their cash flow and navigate the challenges of scaling up. By leveraging tailored financing solutions and retail expertise from partners like Lunr, brands can unlock the working capital they need to fuel growth and succeed in an increasingly competitive market.
